In extreme cases of alleged violations of federal bankruptcy laws, criminal accusations can arise. Bankruptcy crimes are quite rare in practice. There is a strong presumption that issues arising in bankruptcy cases are best handled by bankruptcy judges and trustees as civil matters. In rare situations, criminal investigations and accusations do happen, and we will here discuss some of the possible criminal charges that have historically been used by federal prosecutors. Bankruptcy crimes typically fall within one or more of the following types: knowingly or fraudulently concealing property, making false oaths or accounts, fraudulently doctoring evidence, or withholding documents. We will conclude this article with a general discussion of successful defenses to accusations of a bankruptcy crime.
Fraudulent Concealment Or Transfers. Bankruptcy crimes are described in the subparts of 18 U.S.C.A. §152. Fraudulent concealment or transfer of assets is therefore criminally governed by 18 U.S.C.A. §152. The requisite mental state here is one of “specific intent”: it is necessary to prove that the action was taken “knowingly” and “fraudulently.” This is often difficult to prove. “Fraudulently” means making a false representation of a material fact, with knowledge of its falsity and with the intent to deceive. U.S. v. Berry, 678 F.2d 856, 866 (10th Cir. 1982). Intent to deceive is different from intent to defraud. “Knowingly” means with knowledge, and not due to some mistake or accident. Such knowledge can be inferred, in some situations, from the surrounding circumstances. U.S. v. West, 22 F.3d 586 (5th Cir. 1994).
Debtors have a duty to disclose all property in their case, including “all legal and equitable interests.” Concealment does not require physical “hiding” of the asset. Concealment can be found when someone deliberately prevents discovery of an asset, or withholds knowledge of it. U.S. v. Weinstein, 834 F.2d 1454, 1426 (9th Cir. 1987). Concealment can also be the transfer of title coupled with the benefits of ownership. In Re Bradley, 501 F.3d 421, 434 (5th Cir. 2007). Section 152(1) of the 18 U.S.C.A. deals with concealing property from the bankruptcy trustee, while Section 152(7) involves deliberate concealment before a case is filed. The act of concealment may continue for the entire period of concealment to avoid the bar of the statute of limitations. U.S. v. Stein, 233 F.3d 6 (1st Cir., 2000). In the Stein case just cited, for example, the bankruptcy was filed in 1990, but the federal indictment was not handed down until 1998.
Not all retaining of assets involves improper concealment. There is a very important distinction between a transfer that relinquishes one of all interest in property, and a transfer that does not. In Re Olivier, 819 F.2d 550, 553 (5th Cir. 1987). If the transfer is absolute, it may not be an act of concealment, even if the creditors have been defrauded. This distinction is important, as it bears directly on the statutes of limitations for the criminal prosecution of a transfer offense.
False Oaths. A false oath is basically a false statement or omission in the debtor’s schedules, or a false statement made by a defendant under oath in any part of the bankruptcy proceedings. The false oath must be made on a material issue. In other words, a false statement on a minor issue will not suffice. Section 152(4) of 18 U.S.C.A. deals with false claims. A false claim is willfully and knowingly participating in the filing of a false claim for the purpose of defrauding the bankruptcy court and the other creditors in the case.
False Treatment Of Documents. False treatment of documents is dealt with under 18 U.S.C.A. §152(8). This would arise in cases where an individual falsifies or makes a false entry related to a document related to the affairs of a debtor. Significantly, a court has held that false statements in disclosure statements and plans of reorganization are not considered knowing and fraudulent false entries under §152(8). This is so because disclosure statements and plans of reorganization do not relate to a debtor’s financial recordkeeping. U.S. v. McDaniel, 2006 WL 839095 (W.D. Mich. 2006). Section 152(9) deals with situations where an individual fraudulently withholds documents from the trustee or the court after the filing of a bankruptcy case.
Defenses To Accusations Of Bankruptcy Crimes. Most (but not all) defenses to bankruptcy crimes in general relate to (1) lack of materiality; (2) good faith; (3) mistake of law or fact; or (4) entrapment by estoppel. This list is not exhaustive. A defendant has the full range of defenses available to him under common law or case law, provided the judge allows it to be included in jury instructions. “Lack of materiality” boils down to stating that even though a false statement was made, it was pertaining to an immaterial issue. “Good faith” is the assertion that a defendant was acting without any culpable mental state, or may have been relying on advice from a spouse or governmental agency. Mistake defenses are similar to the “entrapment by estoppel” defense. In entrapment by estoppel, a defendant asserts that he or she was relying on the advice of some governmental agency, whose advice turned out to be incorrect.
Criminal charges involving bankruptcy crimes are rare, and are reserved for unusual or extreme situations. However, if such an accusation is made, it is critical to have legal counsel who is experienced in both bankruptcy law and federal criminal defense. At Phillips & Thomas LLC, we are uniquely placed in this regard. Our practice focuses solely on these two areas of law. When an issues arises that involves both the Bankruptcy Code and the federal criminal statutes, we are able to bring our more than thirty years of collective experience in these two complex areas of law to deal with the problem decisively and successfully.
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